Oct

6

B RafterAs previously mentioned, we track three monetary aggregates and their deviation from target (based on a historical fit).

The triptych presented here is the progression from the Base to MZM to M2 reflecting a decrease of Fed control and concomitant increase in shadow banking control.  (N.B. I have shortened the charts to get them on the same page.)  The progression also shows that the Base is extremely expansionary while M2 is actually restrictive.  That is, Money Supply as defined by M2 is restrictive in the current depression.  The liquidity provided by the Fed is not filtering out to the population at large but being used to rebuild bank balance sheets.

This scenario (assuming it persists) has implications for recovery and inflation.  That is (in our opinion) neither is likely to happen soon.  But you can draw your own conclusions.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Vince Fulco adds:

As a additional resource, this Fed paper delves quite clearly into why excess reserves are not necessarily inflationary both due to their composition and interest payment policies created specifically for the post-crisis period.

Why Are Banks Holding So Many Excess Reserves? [PDF, 380kb]
Todd Keister and James McAndrews
Federal Reserve Bank of New York Staff Reports, no. 380, July 2009


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